• Sun. May 26th, 2024

I Break 2 Big Money Rules As a Financial Planner, but I Stick to One

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  • I always tell my financial planning clients to keep an emergency fund — but I don’t keep cash on hand.
  • My investment allocation is weighted heavily toward higher-risk investments.
  • Even though I don’t follow all my own rules, I always save at least 25% of my income.

As a financial planner and owner of a wealth management firm, I work to ensure our clients have the highest probability of achieving their long-term goals.

That often means giving specific, exact advice on what they must do (and avoid). We’ve worked with enough clients to have certain guidelines and heuristics we know work for increasing net worth and wealth … so much so that I follow these rules myself.

Most of the time, anyway. While I follow my own advice nine out of 10 times, there are some big rules that financial advisors give all the time that I happily break — and one that I follow without exception.

1. I don’t keep an emergency fund

Our general guideline for clients is to keep three to six months’ worth of expenses in cash on hand as an emergency fund.

We recommend keeping that money in a highly liquid vehicle, like a high-yield savings account or money market account. Your priority for your emergency fund should be access and safety, not returns.

But I’m almost allergic to keeping cash on hand! I want to funnel most of my available dollars into investments for long-term growth, or back into my business so that it can generate more revenue. I don’t keep much cash on hand that isn’t earmarked for a specific use in the next few months.

I take the risk of having limited cash on hand for a few reasons. The biggest is that I simply have a high risk tolerance. But I also feel confident in my situation even without a formal emergency fund because:

  1. I own my business, so have more control over my income than someone who works for one employer. Even if revenue dropped, it’s unlikely my personal income would go to $0 overnight in the same way it could if I worked for a company that could lay me off at its discretion.
  2. My wife and I do have some cash in the bank. It’s set aside for various savings goals connected to future spending (like a travel fund and a “date night” fund). If an emergency comes up, we can pull from these cash pools and then work to pay them back later.
  3. I have access to easy-to-liquidate assets, like I Bonds. I could generate cash relatively quickly in a true emergency (although I’d give up some interest that I otherwise could have earned by doing so).

2. I invest more aggressively for my age than standard advice suggests

If you Google “what should my stock-to-bond allocation be,” you might see a general rule of thumb suggesting to subtract your age from 100 to get to the percentage of your portfolio to keep in equities.

I’m 44, so this guideline would have me set up with something like a 60/40 portfolio. Most of our clients, who are also in their 30s and 40s, have portfolios allocated from 60/40 at the very conservative end to 80/20 on the more aggressive end.

However, my portfolio has a 90/10 allocation. I have a much more intricate understanding of market risk and the impact of market downturns. Therefore, I can take more risks because I’m confident that I can comfortably stay in my seat through inevitable market volatility and drops.

I made the choice to optimize for as much growth as possible, because I also know I still have a relatively long timeline between now and when I plan to start tapping portions of my portfolio. That means I not only have the risk tolerance for a more aggressive allocation but also the capacity to take the risk as I have time to ride out the short-term market highs and lows.

The rule I refuse to break: Save (at least) 25% of gross income

I urge my financial planning clients to prioritize their savings and investments. I do the same with my own personal finances. The rule I always keep — no matter what — is to contribute at least 25% of my gross income to investment vehicles designed for long-term growth. That includes a mix of 401(k) accounts, IRAs, and taxable brokerage accounts.

My No. 1 priority in managing my money is to create wealth that will support me and my family now and well into the future. My wife and I want to ensure our own future financial security, and also provide our daughter with more financial stability than we had as kids.

There are various actions I can take to accomplish this goal, but the one that I feel most confident in — and the one that is most under my control to influence — is how much of our household income we put toward building our net worth via our investment portfolios.

Setting aside 25% of household income is non-negotiable for us. My wife and I build our budget around our commitment to this savings rate; what we can spend is determined by what’s left over after we save.

Most rules are there for a reason. They help guide us, keep us (or others) safe, and help us understand how to navigate what could otherwise be a chaotic mess with no reliable way to know what to do in certain situations.

But rules can also unnecessarily limit us or slow our progress toward our specific goals. Context always matters, and helps inform when we need to toe the line — and when we should feel free to confidently break the rules.

By admin

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